As 2016 begins to wind down, counties will see another holiday shopping season and the end of another session of Congress without the passage of federal remote sales tax legislation. Until a legislative solution is found, the amount of uncollected sales taxes that counties, cities and states could use to provide critical public services will continue to grow as the use of the Internet as a retail marketplace continues to surge. As a result, Main Street businesses find themselves at a competitive disadvantage to online retailers, and online retailers and their customers are able to utilize local infrastructure despite not collecting and remitting sales taxes.
A broad coalition representing the government and business communities have long-called for federal remote sales tax legislation and have supported bipartisan solutions in the U.S. Senate and U.S. House of Representatives. To help county officials in their outreach to Congress on this issue during the remainder of this year and into 2017, NACo has developed a new presentation, "Counties Urge Congress to Pass Remote Sales Tax Legislation." The presentation includes background on the remote sales tax issue, an overview of federal remote sales tax legislation and how counties can take action. Counties are encouraged to continue engaging their Senators and Representatives on this long-standing priority of NACo.
Despite not moving forward in the 114th Congress, remote sales tax legislation saw some progress this year. In late August, Rep. Bob Goodlatte (R-Va.), Chair of the House Judiciary Committee, released a discussion draft of his proposed legislation to address the issue – the Online Sales Simplification Act of 2015 (OSSA). While there are some concerns with the legislation, it was a potential signal that the committee may be ready to move some form of legislation. The concerns with the discussion draft are primarily due to how it differs from previous remote sales tax legislation NACo has supported (i.e. Marketplace Fairness Act (MFA – S.698) led by Sens. Enzi (R-Wyo.), Durbin (D-Ill.), Alexander (R-Tenn.), Heitkamp (D-N.D.); and the Remote Transactions Parity Act (RTPA – H.R. 2775) led by Rep. Jason Chaffetz (R-Utah)).
Most notably OSSA utilizes a hybrid-origin system to determine the tax on a remote sale. Previous NACo-supported legislation and the Senate-passed version of Marketplace Fairness in 2013 utilize a destination-based system to source the sale. Destination-based means that whether a remote sale is taxable and the applicable rate are both determined by the customer’s home state. Under the hybrid-origin system, the tax base of the seller’s state is coupled with the tax rate of the buyer’s state to determine the tax applicable to the remote sale. This introduces a system that has not previously been put into practice in the retail world.
The second most notable difference in OSSA is that states would be required to adopt a single statewide tax rate for remote sales. Thus, states that allow local governments to “piggyback” on top of the state sales tax would no longer be able to do that. This essentially prevents local governments from deciding their own sales tax policy. In theory, depending on the state, counties may experience an increase or decrease in tax collections based on the rate that would be adopted.
Progress on this issue was also seen in state legislatures. Several states like South Dakota and Alabama enacted legislation that would require remote sellers to collect sales taxes if they generate over a statutorily set threshold of remote sales in a given year into the state. In other words, even if the remote seller does not have a physical presence in the state, they would be required to collect sales tax as a result of the amount of revenue they are generating from sales within the state. As expected, lawsuits have already been filed by certain businesses challenging the validity of the laws.
The states that are passing or considering such laws are doing so with the intention of generating litigation. The hope is that the cases would go all the way to the U.S. Supreme Court and provide the Justices with an opportunity to reverse the decision in Quill v. North Dakota, 504 U.S. 298 (1992). Quill upheld the requirement that a retailer must have a physical presence in a state for that state to require it to collect sales taxes.
Undoubtedly, this is a different approach to address the issue. But given the lack of congressional action, supporters of federal remote sales tax legislation were encouraged in 2015 when Justice Kennedy wrote a concurring opinion in Direct Marketing Association v. Brohl,135 S. Ct. 1124, 1135 (2015) in which he argued that given the evolution of technology, it is likely time for the Court to revisit the physical presence standard upheld in the Quill decision.
In 2017, several more states are expected to consider similar legislation. NACo will continue to monitor and report developments in the courts and in Congress as they occur.
Resources:
- NACo Policy Brief on Remote Sales Tax
- NACo Legislative Presentation on Remote Sales Tax
- NACo Marketplace Fairness Action Center
Contact: Mike Belarmino at mbelarmino@naco.org or at 202.942.4254
